Using
the Tax Code to Promote Postsecondary
Education:
We Might as Well Do It Right
Several members of Congress
are considering how to improve tax provisions that are designed to help people
obtain postsecondary education and training, and recent reports on this topic
has been issued by the Center on Budget and Policy Priorities and the Tax Policy Center.
The Senate Finance Committee is expected to mark up legislation on education
tax benefits after the Memorial Day recess. Currently taxpayers paying college or training expenses, including those who are not itemizers, can deduct up to $2,000 ($4,000 for married couples) for tuition and fees. Also, the Hope credit is available at a maximum of $1,650 per student this year (indexed for inflation) and the Lifetime Learning Credit (LLC) is available at a maximum of $2,000 per family. There are also several tax-preferred savings vehicles for education (Coverdell
Education Savings, Accounts, Qualified Tuition Programs, and education savings
bonds).
Lack of Progressivity
There are several problems
with these tax benefits. For one, they're not very progressive. This is particularly troubling because we usually think the whole point of these tax breaks is to encourage people to obtain postsecondary education who otherwise would not, and wealthier families will typically send their children to college regardless of what tax benefits are available. Lower-income families, who are more likely to
respond to subsidies for education, are not well-targeted by the tax benefits.
The tuition and fees deduction
and the Hope credit and LLC are unavailable for people without income tax
liability, so a sensible reform would be to provide a refundable credit. Most families of modest means pay federal payroll taxes but are not wealthy enough to owe federal income taxes (a family of four with an income of $42,000 won't pay federal income taxes in 2007). For
these families, only a credit that is refundable (that results in negative
income tax liability and a check from the IRS) can help.
The maximum LLC cannot
be used unless a family spends at least $10,000 on education (because it
credits 20% of the first $10,000 in expenses, up to a maximum credit of $2,000).
One speaker at a forum on this topic hosted by the Tax Policy Center on Wednesday
pointed out that 90 percent of students have expenses below $10,000. The
tuition and fees deduction is regressive because its value depends on the tax rate the taxpayer is subject to. A family subject to a 35% tax rate can deduct $4,000 and reduce their taxes by $1,400, but a family subject to the 10% rate could deduct $4,000 and reduce their taxes by only $400.
Complexity
Another problem is that
many families may find the rules governing these tax breaks too confusing
and may not even realize that these benefits are available. A taxpayer must choose to use either the tuition and fees deduction, the Hope credit, or the LLC. A GAO report in 2005 found
that over a fourth of taxpayers eligible don't take advantage of any
of these tax benefits, and those who do use them often don't use the most
advantageous tax break for their situation.
New Proposals Could Solve Some of These Problems
A bill sponsored by Rahm
Emanuel (D-IL), Dave Camp (R-MI) and others in the House and Evan Bayh
(D-IN) in the Senate would combine the three main tax benefits into
one credit of up to $3,000 for postsecondary education expenses, including
a much broader range of expenses (such as room and board, books, supplies
and transportation). These expenses other than tuition often make up the bulk of costs for students of modest incomes in community colleges. The credit would cover 50% of the first $3,000 and 30% of the next $5,000 of these expenses. Up to half of the credit calculated based on expenses would
be refundable, adding to the progressivity of the proposal.
Other proposals are being discussed, including one from Senator Charles Schumer (D-NY) for a simplified credit that would not be refundable, and which the Finance Committee is likely to consider. Advocates for making postsecondary education more accessible are hopeful that the Finance Committee can be pushed to move in the direction of the bill being sponsored by Emanuel, Camp and Bayh.
Should Thomas Edison have Lobbied for a
Moratorium on Taxing Electric Devices?
Should
states be able to tax access to the internet? The federal law that prevents
such taxes expires in November. Witnesses testified before the House Judiciary
Subcommittee on Commercial and Administrative Law on Tuesday on the merits and demerits of extending or repealing the ban on state and local taxation of internet access. Proponents of the ban argued, back in 1998 when it was introduced, that internet commerce was a fledgling industry that needed to be nurtured (i.e. subsidized by taxpayers) but now e-commerce is a $25 billion industry. Now proponents say that taxes will slow down the process of expanding internet access to those who currently can't afford it. Experts on the other side point out that the cost of a computer is obviously a greater barrier for poor families than internet taxes, which would probably be a small cost in comparison. Keep in mind that states are already restricted for the most part from collecting sales taxes on internet sales (the Supreme Court says a state can't force a company that is not "physically present" in
the state to collect sales taxes). As more commerce shifts to the internet,
states will have to raise other taxes or cut services to make up for the
lost revenue.
The best articulation of the issue came from Mark Murphy of the American Federation of State, County and Municipal Employees. "As our economy and society evolves," he explains in his written testimony, "by definition more and more economic activity will be innovative and advanced. It cannot all be made tax-exempt. One can imagine that if this approach to tax policy had been taken earlier in our history, then manufactured goods, or the automobile and gasoline, or airline service would be "tax free," while only agriculture would be left to bear the tax burden."
Louisiana
Lawmakers Consider Measure to Reverse Part of Voter-Approved Tax Fairness Reform
Amidst new forecasts of a projected budget surplus for each of the next two fiscal years, Louisiana lawmakers
are considering partially repealing one of the more progressive
tax reforms enacted this decade. Those reforms - popularly known as the
Stelly Plan and enacted by ballot initiative in 2002 - have substantially
improved the fairness of Louisiana's tax system, as they replaced sales taxes on food, medicine, and utilities with progressive changes in the personal income tax. The state Senate has just passed a bill that would undo part of the 2002 income tax hikes by reinstating
an income tax break, eliminated under the Stelly Plan, that is only available
to the 20 percent of Louisianans who itemize on their federal income
taxes.
Amazingly,
the bill's sponsor argues that "This is not a bill for all those high-income people. This is a bill for the middle class." But
as the Louisiana Budget Project notes, the benefits of the Senate plan would accrue almost entirely to the wealthiest Louisiana families - while a state Earned Income Tax Credit would provide targeted tax cuts for middle-income working families at a third of the cost of the Senate-passed plan. Find out more on the Talking
Taxes weblog.
Crisis and Opportunity in the Old Northwest
Michigan's finances are in bad shape. Standard and Poor's recently lowered the credit rating on the state's $5 billion debt, which is projected to grow by $800 million this year and a staggering $1.8 billion in 2008. Some Michigan lawmakers
are contemplating a bold move to shore up the state's collapsing finances:
a graduated income tax. Moving away from Michigan's single-rate income tax
requires changing the constitution, which in turn requires the people's approval
in the form of a referendum-not an easy task. However, the measure has the
support of many House Democrats, who plan to put the measure to voters as
early as next November.
The plan's supporters must hope it fares better than a progressive proposal in Minnesota that would have instituted a new top income tax rate targeted to the wealthy. This proposal was
vetoed by the Governor despite overwhelming public support. A multiple rate income tax is crucial to counter the regressive effects of property and sales taxes. Michigan lawmakers have a rare opportunity to both end the current fiscal crisis and create a fairer tax structure for years to come.
Term
Limits + Fiscal Policy = Bad Idea
For economic and social justice advocates, Missouri's legislative
session came to a welcome end last week. Pundits across the state started
weighing in on what many have said was a "disappointing legislative session."
Term limits, which Missouri voters approved in 1992, may have played a role in the unwieldy session. Legislators
are now restricted to serving eight years in the House and eight years in the Senate. In fact, the average legislative experience of a Missouri senator is 3.4 years. Term limits mean that there are few legislators with long-term legislative experience who
can be called on to shepherd bills through the legislature and show new
legislators the ropes. This year, lawmakers
had to craft corrections to legislation that had already been sent to
the governor while they raced to pass various unnecessary tax breaks. Wealthier
seniors got a tax cut costing $154 million a year, and $103 million in
credits were handed out for everything from beef to hybrid vehicles,
while legislators failed to find time to restore cuts in healthcare and
other needed services.
The
impact of term limits also mean that when the full impact of the tax cuts passed this year take effect,
many legislators will be out of office and won't have to deal with
the budgetary consequences of their tax cut votes. Perhaps more so than in prior years, closed-door negotiations that don't involve the minority party are commons. Senator Tim Green said that special interests have a stronger influence now than ever before, "Political
contributions and special interest groups have become the avenue of
reason, not public policy. Special interest dictates what goes on in
this body."
Pennsylvania Proposal: Have Oil Companies Pay Fair Share, Prevent Corporate Tax Avoidance
Pennsylvania Governor
Ed Rendell has proposed a new "Oil Company Gross Profits Tax" on oil companies doing business in the state. The tax, which would be levied in place of the state's regular corporate profits tax, would
be calculated using "combined reporting," a
loophole-closing technique that has already been enacted in two states
this year, and is estimated to raise more than $750 million a year. A
new report from the Pennsylvania Budget and Policy Center argues that
Rendell's proposal would be a sustainable and fair funding solution for
Pennsylvania's transportation funding needs. Read the report here.
Latest Tax Gimmick
As the Memorial Day travel weekend begins, some Texas lawmakers are trying to push through a
three month "holiday" from the state's 20-cents-per-gallon excise
tax on gasoline. The editorial board at the San Antonio Express News calls this an unaffordable exercise in "irresponsible pandering," arguing that the Texas-sized
cost of the holiday - up to $700 million - would drain a projected
budget surplus on which multiple claims have already been made.
